Sato we provide good housing.

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3 Contents Sato we provide good housing 4 Vision, values and strategy 6 Review by the President and CEO 8 Description of the business climate 10 Investment in housing 14 Housing development and construction 20 Social responsibility 23 Annual report of the Board for the period 1 January 31 December Profit and loss account 28 Balance sheet 29 Statement of cash flows 30 Accounting conventions of the financial statements as at 31 December Notes to the financial statements 35 Investments 45 Key indicators 49 Proposal for the disposal of profits 50 Auditors report 51 Corporate governance 52 The Board of Directors 54 Corporate Management Group 55 Information for shareholders 56 3

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5 Sato we provide good housing. Sato s business is based on an understanding of the customers housing needs and on providing the right kind of housing solutions. The key factors for success are knowledge of the housing market and the ability to anticipate changes in the market. 5

6 Sato we provide good housing Sato is a company providing housing services: its business is comprised of investment in housing and housing development and construction. Our business is based on understanding the customers housing needs and on providing the right kind of housing solutions. We focus on owning, renting, commissioning and selling housing. Regionally our business concentrates on the larger urban centres of growth. We own roughly 23,000 rental homes and shared ownership apartments and we actively develop the housing portfolio we own by practising investment and divestment. In the past few years, we have invested in roughly 2,000 housing units and divested roughly 1,000 units a year. We have built roughly 1,500 new homes a year, more than half of which are owner-occupied homes for selling, and the rest are projects built on commission. During its sixty-five years of history, Sato has produced more than 200,000 new housing units, which represents roughly ten per cent of Finland s housing stock. Right-of-occupancy housing is part of our service offering through an associated company, Suomen Asumisoikeus Oy. We have offices in Helsinki, Tampere, Turku, Oulu and Jyväskylä. Sato has roughly 200 employees. Sato s owners are Finnish employment pension companies, banks and insurers, and corporations in wholesale and retail and in industry. 6

7 Financial key indicators * Turnover (MEUR) Profit before extraordinary items and taxes (MEUR) Balance sheet total (MEUR) 1,106 1,074 Return on equity, % Return on investment, % Equity ratio, % 14.3 ** 15.8 Earnings per share (EUR) Equity per share (EUR) Dividend (MEUR) 12.1 *** 8.2 Operational key indicators Net rental income of units, % Rental occupancy rate of units, % Number of housing units 23,095 23,875 Total output of new units 1,327 1,659 Output of owner-occupied homes and shared ownership apartments Personnel Personnel, average Personnel, 31 Dec * the financial key indicators for 2003 are not comparable due to a change in the consolidation method ** the change in the consolidation method reduces the equity ratio by 1.8% *** the Board of Directors proposal to the annual general meeting * the indicator was calculated for the period without Sato-Asumisoikeus Oy ** new consolidation method 7

8 Vision, values and strategy Vision Sato is the provider of the best housing services to its customers. Sato is a company that is attractive to investors, giving its owners a competitive return in view of the risks in this business. Values The values guiding Sato s operations are as follows: the personnel s expertise skilled personnel is our strength partnership we win by working together customer satisfaction we keep our promises profitability profit enables us to build the future Strategy Sato s business sectors are investment in housing and housing development and construction. Operational profitability is improved by focusing on core competencies, by developing operational business and by devoting effort to customer relationship management. The aim is profitable growth. The target for return on equity is at least ten per cent. Operations are targeted geographically on areas with the greatest long-term demand for housing: the Helsinki Metropolitan Area, and the Tampere, Turku, Oulu and Jyväskylä economic zones. Investment in housing includes the active development of the housing portfolio through acquisitions and sales. The aim is to consolidate holdings in approximately thirty municipalities and to expand the relative proportion of small apartments in rental units. Investments are channelled mainly to the old housing stock and to new housing for the elderly. The main emphasis in housing development and construction is on the production of owner-occupied homes. Enough land inventory is acquired to meet needs for three years construction. Crucial factors for the company s success are knowledge of the housing market and the ability to anticipate changes. Information on the company and its goals is being stepped up and the transparency of operations is being increased. 8

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10 Review by the President and CEO The business climate The economic trend continued to be positive and consumers confidence in their own economy continued to be strong. Interest rates remained low and demand for owner-occupied homes was good. Housing construction concentrated on owner-occupied homes and was exceptionally buoyant relative to the population of Finland and the level across Europe; this was due to internal migration and advantageous terms for housing loans. Although the production figures for 2005 so far indicate no significant difference from last year, new construction is likely to turn down in quantitative terms in the long run. Demand for owner-occupied homes led to an increase in tenant turnover in rented homes, and demand was heavier in the regions of centres of urban growth. Output quantities of rental homes remained low as high production costs relative to rent levels in the market undermined profitable investment in this sector. Because of the restrictions imposed on state- and interest-subsidised projects, it is mostly local authorities and companies owned by them that are initiating these projects. It is our view that the rental housing stock declined last year, partly because private individuals and institutional investors sold off rental homes for owner-occupied units. Although the rental housing market is running smoothly at the moment, in the future a shortage of rental homes particularly in the Helsinki Metropolitan Area may interfere with growth in the service sector and thus hamper economic growth. An attractive field of business Investors have become more active in the property business in the past few years. Increased international interest has made itself apparent mainly in the office premises and property service segments, but in the future international investors are also likely to appear in the housing sector. Finnish institutional investors are stepping up indirect investment in addition to direct property ownership. They have stepped up their investments in property funds and in companies which own housing. Deals made in Sato shares send the same message: the pension insurance companies Ilmarinen and Varma became major shareholders in Sato. The Ministry of Finance appointed a committee to work on the present law on property funds. Their report, which was issued at the end of the year, did not meet the sector s expectations and hopes in all respects, however. The main problem is seen as the committee s negative stance on property funds in the form of limited liability companies. A fruitful year for Sato During the year under review, Sato s strategy was focused in respect of business priorities, profitability targets and geographical business areas. The policies outlined and efficient operational functions, combined with a favourable market outlook and low interest rates, generated a record profit. 10

11 The biggest single investment in Sato s history was the acquisition from the Suomi Group of roughly 1,800 housing units, mostly in the Helsinki Metropolitan Area. This transaction supports the chosen strategy, according to which the company will focus geographically on the largest urban centres of growth. The aim in the long term is to target investments in housing on approximately thirty municipalities. During the year under review, the number of municipalities in which the company s housing units are located declined by roughly twenty as a result of sales. With demand for rental homes tending towards small units, we increased the proportion of these in our housing portfolio and divested some of the large rental units. Although the state of the market favoured sales and was challenging for rental business, we succeeded in improving the rental occupancy rate of units relative to the previous year. In the housing development and construction, the regional focus and the channelling of resources towards the construction of owneroccupied homes improved operational profitability. The procurement of plots during the past year will also provide us with good prospects in years to come. Aiming for customer-driven operations An essential aspect of success is to understand the customers needs and to base flexible customer service on them. Sato s housing offering and services are developed in anticipation of the customers expectations. We specified the organisation s spheres of responsibility to promote these objectives. In the new SATO PlusHome projects, individual wishes for housing are realised by offering a wide range of alternatives in the unit s floor plan and in the choice of materials. The positive feedback received on the first project encourages us to continue building homes based on this concept. To diversify and promote the possibility for the elderly to live at home for as long as possible, we and the Helsinki Deaconess Institute have embarked on action to combine housing with care services. This partnership facilitates the provision of care services for people already living in Sato s rental homes and in new facilities to be built for ageing people. Sato enjoyed a successful year in Sato s expert personnel worked systematically to achieve results and to boost service quality standards. This also creates a good basis for the future. I express my warm thanks to the personnel. I would also like to thank the customers, the members of the Board of Directors, the owners and other stake-holders for the good job we have done together. Erkka Valkila President and CEO 11

12 Description of the business climate The economic trend was favourable and consumers confidence in their own economy continued to be strong. Owner-occupied housing has expanded its popularity due to a prolonged period of low interest rates, and the proportion of first-time buyers has been significant. Construction has focused on owner-occupied homes and trade in housing has been buoyant. This has been reflected in the market for rental housing, where rental occupancy rates have deteriorated. Trade in housing is forecast to continue to grow, albeit more moderately than in recent years. In the Helsinki Metropolitan Area, there are already signs that the market for owner-occupied homes is slowing; the time it takes to sell homes has increased, at least temporarily, and the rise in prices is topping out. As a result of high prices, the small supply of houses, and a scarcity of plots, internal migration has shifted to the municipalities surrounding the Helsinki Metropolitan Area. Current interest rates have resulted in a movement from rental apartments to owner-occupied homes. In the Helsinki Metropolitan Area and the largest urban centres of growth, the need for rental homes is ongoing due to internal migration and changing stages of life. Demand for rental homes is focused primarily on small housing units. Rental accommodation is also growing among the elderly due to an upswing in sheltered housing. Because of the high cost of construction and plots, there is little construction of new rental homes. Some rental homes owned by institutional investors and private individuals have been sold to owner-occupiers. In the long term, the volume of rental home construction will be inadequate to meet the demands for growth among trade and industry, particularly in the Helsinki Metropolitan Area. 12

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15 A good supply of housing. In demand for rental homes, questions of location, the size of apartments, and the price-quality ratio come to the fore. This drives the Group s investments and divestments as well as the content of the housing services supplied. 15

16 Investment in housing Operations The mission of investment in housing is actively to develop the housing portfolio by means of investment and divestment. During the year under review, 1,808 housing units were acquired and 2,588 units were sold from the housing portfolio. Increased tenant turnover and shorter periods of tenancy are challenges for rental business. However, the Group managed to increase the rental occupancy rate of units from the level of the previous year. The turnover from investment in housing in 2004 was 250 (164) million euros and profit before extraordinary items and taxes was 26.5 (17.4) million euros. Of turnover, rental income was 150 (144) million euros and sales of shares were 98 (17) million euros. The 81 million euros from sales of shares was generated by final purchases of shared ownership apartment financed on a ten-year interest-subsidised loan. The profit from rental business was 23.3 (17.7) million euros and the capital gains on divestments were 11.0 (4.2) million euros. A drag on profits was exerted by write-downs amounting to a total of 7.8 (4.5) million euros on property for sale as a result of the regional consolidation. Holdings of housing The Group has holdings of housing in 94 (115) municipalities. The long-term aim is to consolidate investments in housing in roughly thirty municipalities. The main thrust of operations is being moved to the larger urban centres of growth; the Helsinki Metropolitan Area and the economic zones of Tampere, Turku and Oulu. At year-end, the Group held a total of 23,095 (23,875) housing units with a balance sheet value of 925 (855) million euros. Of these units, rental homes accounted for 91 (88) per cent and shared ownership apartments for 9 (12) per cent. Approximately 60 per cent of the housing portfolio in terms of value is in the Helsinki Metropolitan Area and its surrounding municipalities. The Group holds 50 per cent of Suomen Asumisoikeus Oy, which at year-end held 13,736 right-ofoccupancy housing units. Housing investments and divestments During 2004, a total of 1,629 (347) housing units were purchased of the existing housing stock. Newly completed homes totalled 179 (228). Of the shared ownership housing, 87 (31) housing units were repurchased for use as rental homes. In value terms, 85 per cent of the investments in housing were located in the Helsinki Metropolitan Area. The value of housing investments totalled 139 (32) million euros. The main investment during the year under review was the purchase by the Group of 1,572 housing units from the Suomi Group in the beginning of the year. With this acquisition, Sato boosted its range of housing, particularly in the central districts of Helsinki. During 2004, a total of 1,423 (498) rental homes were sold from the Group s housing portfolio on the basis of the strategic regional consolidation and increase in the proportion of small units. The value of the divestments was 57 (21) million euros. Of the divestments, 1,091 16

17 housing units constituted entire properties located in 15 municipalities outside the centres of urban growth. In addition to this, 332 individual housing units were sold, mostly large units in the Helsinki Metropolitan Area. During the period , the shared ownership periods of shared ownership apartments completed on the basis of a 10-year interestsubsidised loan ended during the year under review. In addition to the above-mentioned divestments of rental homes, occupants of shared ownership properties purchased ownership of a total of 1,165 (75) housing units. As a result of investments and divestments, the value of the housing portfolio rose during 2004 by 70 million euros and the number of homes declined by 780 units. Rental business The Group s average monthly rent per square metre in 2004 was EUR 8.99 (EUR 8.48) for rental housing and EUR 7.14 (EUR 6.93) for shared ownership apartments. The average increase in rent for valid leases was 3.5 (2.1) per cent. As a result of changes in the structure of the housing portfolio and its regional distribution and because of new leases, the change in rents per square metre of rental homes averaged 6.0 (4.2) per cent on the previous year. The financial occupancy rate for rental homes was 96.5 (95.9) per cent and that of shared ownership apartments was 97.5 (98.7) per cent. A drag was exerted on the financial occupancy rate by units which were vacant for renovation and for sale. The turnover of housing units in 2004 was 34.2 (33.6) per cent. The net rental income of rental housing was 8.0 (8.2) per cent. Management of the rental occupancy rate and turnover was challenging throughout the financial year, as the low interest rates and long loan periods for home loans directed housing demand towards owneroccupied homes. By deploying effort in repairs, developing the rental business model and marketing, the rental occupancy rate was improved relative to the previous year. 17

18 Resident activities The goal of partnership with residents is to influence amenity value and the management of housing costs in interaction both with the residents and among them. Partnership with residents is carried out on many levels: for a specific property, regionally, and nationwide. Collaboration between Sato and residents is spotlighted in each year of business in an annual theme chosen by the residents. The theme for 2004 was Safety in the Neighbourhood and the residents chose the theme of Neighbourliness for this year. The maintenance of holdings of housing The allocation of repairs is based on life cycle plans for the individual building and on assessments of the need for repairs. During the year under review, a total of 23 (23) million euros was spent on repairs of properties. To enhance the management of maintenance, the introduction of an electronic maintenance manual was expanded. The aim is to achieve control of the entire maintenance of the property holdings via the internet by the end of Regional competitive tendering for property maintenance was continued. During 2004, the trend in energy and water consumption in the property holdings was charted for the past three years in order to specify a target for conservation. Examples of the actions for conservation include fitting water-saving plumbing fittings in homes and inspecting building s HEPAC regulators. Also, energy audits were performed to determine the energy budget of buildings. During the year under review, Sato went over to partnership solutions on a broad front for its holdings of housing. Also, the business interests of Sato s office Nurmijärvi were sold off. In the beginning of 2005, partnership operations are being extended further to cover roughly 70 per cent of the Group s housing portfolio. Contracts have been made for the outsourcing of building supervision, management, renting and sales of properties as well as services related to maintenance and repairs. The biggest contractual partners are Suomen SKV Oy and YIT Kiinteistötekniikka Oy. 18

19 Holdings of business premises At year-end, the Group owned 54 (78) business premises for sale, with a total area of 4,634 (9,569) square metres and a book value of 2.8 (5.2) million euros. During the financial year, commercial and office premises totalling 6,372 (4,278) square metres were sold for a total of 2.1 (2.4) million euros. In addition, the ownership of Sato House in the Käpylä district of Helsinki, sold in 2003, was transferred to Suomi Mutual Life Assurance Company on 2 January The Group operates in the building as a tenant. Outlook for the near future The consolidation of the housing portfolio in the urban centres of growth and in small apartments will continue. Demands for competitiveness and service have increased in the rental housing market, and questions of location, the apartment s size and its price-quality ratio are becoming accentuated. This trend will guide the Group s investments and divestments as well as the content of the housing services provided. Investments will be channelled into the existing housing stock. The financial foundation of business operations will remain steady in respect of the housing portfolio held by the Group. 19

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21 An individual home. In newly built properties, Sato s customers are offered new opportunities to choose individual materials and fittings. The home s far-reaching adaptability boosts its long-term practical value. 21

22 Housing development and construction Operations Housing development operations focused on construction of owner-occupied homes. Construction projects were also carried out in the form of commissions for corporate customers. The volume of production during the year under review was 1,327 (1,659) housing units, of which 831 (752) were owner-occupied and shared ownership housing units. At year-end, a total of 974 (1,371) new housing units were under construction, of which 723 (828) were owner-occupied homes. Regionally construction concentrates on the Helsinki Metropolitan Area and the economic zones of Tampere, Turku, Oulu and Jyväskylä. The turnover from housing development and construction in 2004 was 112 (84) million euros and profit before extraordinary items and taxes was 7.7 (0.5) million euros. Write-downs on plots to be divested totalling 0.5 (0.5) million euros exerted a drag on the profit. Output of owner-occupied homes During the year under review, a total of 701 (566) owner-occupied homes were completed. Of these, half are in the Helsinki Metropolitan Area, 20 per cent are in Oulu, and 10 per cent each are in Tampere, Jyväskylä and Turku. The number of unsold units at year-end was 13 (7). At the end of 2004, 723 (828) owner-occupied homes were under construction, of which 358 (405) were unsold. The financing tied up in the Group s output under construction at year-end was 19.6 (15.6) million euros. The main privately financed apartment building projects were started in the Lauttasaari district of Helsinki, the Saunalahti district of Espoo and the Eteläranta district of Turku. The first SATO Plus-Home project, the construction of which was started during the year under review, was completed in the Arabianranta district of Helsinki in February PlusHome is based on an open housing construction technique, and design and data management methods have been developed for the concept to assist customer service and the progress of design. Future occupants have availed themselves of new possibilities for alterations and addition work, and all the 78 owner-occupied homes in the project differ in solutions or materials. On the basis of the positive feedback obtained on the concept the construction of the next PlusHome project began in Espoo and the planning of further projects is in hand. Two projects were started by Sato at the site of the 2005 National Housing Fair in Oulu: an eight-storey apartment building which will become a local landmark and a seaside terraced housing and low-rise project. For the Housing Fair to be held in Espoo in 2006, Sato is working together with Finnforest Corporation to build wooden low-rise buildings based on a box frame unit technique. This is a pilot project in the development of Sato s producer-format low-rise concept. Sato received a mention of honour for design and quality from the Housing Fund of Finland for the Asunto Oy Vantaan Bäckbynpuisto owner-occupied home project which it built. 22

23 Client commissioning On client commissioning, the construction of a total of 626 (1,093) new housing units was commissioned, of which 130 (186) privately financed shared ownership apartments and 50 (42) rental homes were for the Group s ownership. 109 right-of-occupancy housing units were completed for Suomen Asumisoikeus Oy. At the turn of the year, 251 (413) new housing units were under construction for clients. Output of senior homes and sheltered housing At the turn of the year, 66 senior homes and sheltered housing units were under construction in the Haaga district of Helsinki. The design of the first projects resulting from a partnership between Sato and Helsinki Deaconess Institute was started, to be completed in the Pitäjänmäki district of Helsinki and the Tapiola district of Espoo. Plots At the end of 2004, Sato held land for construction of owner-occupied homes amounting to roughly 65,000 square metres of floor area. In addition to this, the permitted building volume based on plot reservations and letters of intent totalled roughly 120,000 square metres of floor area. Projects under zoning development total roughly 100,000 square metres of floor area. During the year under review, Sato won a handover competition for a plot in the Tuuliniitty district of Tapiola, arranged by the City of Espoo. The plot has 6,500 square metres of floor area in permitted building volume. Other major acquisitions of plots were housing tracts comprising 5,800 square metres of floor area in the Koivuhaka district of Vantaa and a plot on Linnankatu in Turku with 4,300 square metres of floor area in permitted building volume. In 2004, roughly 14 million euros was invested in plots of land with a permitted building volume totalling 37,500 square metres of floor area. The principal new plot reservations were in the Viikki, Vuosaari and Arabianranta districts of Helsinki totalling more than 15,000 square metres of floor area, which were received from the city. In all, permitted building volume amounting roughly to 44,000 square metres of floor area was allocated through plot reservations and letters of intent. The main zoning projects applying to Sato s unzoned land inventory are under way in the Saunalahti and Tillinmäki districts of Espoo and in the Sarfvik area in Kirkkonummi. In these zoning plans, Sato is to receive a total of over 50,000 square metres of floor area in permitted building volume. Construction in the areas is intended to begin in the period Roughly 51,000 square metres of floor area of the Group s permitted building volume was brought into production. Outlook for the near future Demand for owner-occupied homes is expected to level out and the price level is forecast to hold steady. Sato s output volume of owner-occupied homes will be on a par with the previous year s level, being approximately 700 housing units. 23

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25 Social responsibility Taking care of good housing Sato s housing services evolve in step with changes in society. Our operations began in the 1940s, when Sato took part in postwar reconstruction. In the course of its history, the Group has developed many financing solutions that lowered the threshold for buying new homes, and it has increased options for the housing of the elderly and services that support their housing. Today, Sato owns and rents, builds and sells homes to different groups of customers. The amenity value of residential areas is enhanced by participation in zoning and area projects. During the year under review, for example, Sato has supported the development of the Suvela and Kirkkojärvi district of Espoo by taking part in the City of Espoo s Safety project, in which local residents jointly improve the safety and enjoyableness of the area. Partnership with residents Sato collaborates with its residents on many levels: for a specific property, regionally, and nationwide. The aim of partnership with residents is to influence amenity values in customer-drive and diverse ways. It is of great importance also in keeping a check on housing costs. Collaboration between Sato and residents is spotlighted in each year of business in an annual theme chosen by the residents. The theme for 2004 was Safety in the Neighbourhood. During the theme year, the safety situation for buildings was checked out and training sessions were held. The promotion of safety was also spotlighted in maintenance and repairs. A Building Safety Book was issued for the residents use. During the present year, the theme is neighbourliness. In partnership with residents, efforts are deployed in improving communications with residents and in smoothly running everyday matters. During the year under review, Sato s website was updated to serve the residents even better than before. Environmental programme Sato s environmental programme was issued in The aim of the programme is to promote sustainable development in the residential properties owned and produced by the Group and for in-house procedures. The programme embraces the environmental requirements of both the commissioning process and the various stages of buildings use as well as benchmarks for assessing the environmental impacts. Responsibility for environmental matters belongs to Sato s entire personnel and its partners. The environmental committee appointed for the company supervises the implementation of the programme, produces an annual environmental action plan, and charts the needs for improvement. Its mission is also to be in charge of the implementation of changes. It also awards an annual environmental prize for the best practices promoting sustainable development. The target for 2004 was to initiate the systematic monitoring of energy consumption in Sato s properties. Half of Sato s approximately one thousand properties are now being monitored. In addition to monitoring, energy audits 25

26 of buildings are held, and on the basis of these energy-efficient adjustments are made or repairs are carried out on structures, technical functions or equipment. Regulation and inspection guidelines have been produced for properties using district heating to be used, for example, for maintenance on the properties district heating centres and for putting inspection services out for competitive tendering. The intention is to improve the energy efficiency of heating and control systems. In order to reduce water consumption, the conversion of roughly 5,000 homes plumbing fittings for water-conserving ones has been initiated, and it is estimated that this action will result in roughly 10 per cent savings on water consumption annually. To promote the conservation of energy, Sato is on the development committee for the nationwide residential buildings energy conservation agreement (AESS). In cooperation with the Information Centre for Energy Efficiency, Sato has developed reporting on residential properties by which the Ministry of Trade and Industry and the Ministry of the Environment are monitoring on a nationwide basis the actions of the AESS signatory companies and corporations and their results in reducing energy consumption. Personnel wellbeing Personnel wellbeing is measured with regular workplace morale surveys. According to the survey carried out in the spring, the main items for improvement were in-house communications and cooperation between units. During the year under review, six days of in-house training were held per employee in the Group. The subjects of the training were particularly linked to customer service and data systems. The implementation of Sato s values is guided and promoted by a values team consisting of personnel and management. The main event associated with action on the values, the Sato Days, was held in Hyvinkää in June. Personnel sports and recreational activities were subsidised during the year under review to the tune of 23,000 euros. Absence due to sickness during the year under review was four days per employee. Sponsorship Sato s sponsorships during the year under review were channelled to work with seniors and the elderly, youth and team sports, and disaster relief. 26

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28 Annual report of the Board for the period 1 January 31 December 2004 Turnover and net profit The Group s turnover was 362 million euros (248 million euros in 2003), of which the turnover of investment in housing was 250 (164) million euros and that of housing development and construction was 112 (84) million euros. The Group s profit before extraordinary items and taxes was 34.2 (17.9) million euros. The net profit of investment in housing was 26.5 (17.4) million euros, including a total of 11.0 (4.2) million euros in capital gains on divestments and writedowns totalling 7.8 (4.5) million euros effected on holdings of housing. The net profit of housing development and construction was 7.7 (0.5) million euros, including write-downs totalling 0.5 (0.5) million euros effected on plot holdings. An additional appropriation of 1.8 million euros was made in connection with the operational reorganisations effected, refund claim costs, and old liabilities under the Housing Transactions Act. The Group s return on equity was 15.8 (6.6) per cent and its return on investment was 6.6 (5.2) per cent. Change in consolidation method and the timetable for IFRS The consolidation method for housing companies and mutual building management companies has been changed. Holdings in housing companies and mutual building management companies confer entitlement to control of certain apartments. The updated consolidation method gives a more accurate view of the Group s financial status when minority shareholders shares in these companies equity are not treated as the Group s minority shareholding and the portion of debt to which these shareholders are liable is not consolidated with the Group s debts. The effect of the change in the consolidation method is shown in the notes to the financial statements. According to a decision of Sato Corporation plc s Board of Directors, the Group will go over to compliance with IFRS accounting standards as of the beginning of the 2007 financial year. Financial status The consolidated balance sheet total as at 31 December 2004 was 1,106 (1,074) million euros and the Group s interest-bearing liabilities were 790 (741) million euros. Because of the nature of the shared ownership system, the financial statements of the housing companies holding shared ownership apartments have not been consolidated. A total of 151 (254) million euros in interest-bearing liabilities apply to the shared ownership apartments. As surety for these debts, certificates of mortgage to a combined total of 216 (323) million euros have been attached to the property of housing companies holding shared ownership apartments. Group companies had repurchase commitments on sold shared ownership apartments to a total of 20 (30) million euros, of which the advance payment debts in the consolidated balance sheet includes 19 (28) million euros. The Group s equity ratio at year-end was 14.3 (15.8) per cent. Financing The cash position of the Group and parent company was favourable throughout the financial year. The Group s financial assets at year-end were 20 (21) million euros. Interest-bearing liabilities at year-end were 790 (741) million euros, of which market rate loans totalled 367 (284) million euros, interest-subsidised loans totalled 101 (123) million euros and state subsidised loans totalled 322 (332) million euros. Of the capital of market rate loans at year-end, 180 (137) million euros was hedged with interest-rate swaps, the average maturity of which was 31 (35) months. Group structure Sato Corporation plc is the parent company of the Sato Group. To streamline operations and to clarify the Group structure, a total of 56 subsidiaries were merged and wound up through voluntary liquidation during the financial year. During the financial year, the Group acquired the entire issued stock of Sato- Taso Oy and it was merged with Sato- Rakennuttajat Oy. The operations of the Kuopio regional office and Itä-Suomen Sato Oy, which operated in Joensuu, were terminated on 30 September

29 Change of the company name The Board of Directors decided to propose to the annual general meeting a change of the company name to SATO Oyj and in English SATO Corporation. Investment in housing On 31 December 2004, the Group held a total of 23,095 housing units (23,875). The financial occupancy rate of the housing units averaged 96.6 (96.2) per cent and occupant turnover averaged 34.2 (33.6) per cent. The net rental income of rental housing was 8.0 (8.2) per cent. The turnover from investment in housing was 250 (164) million euros and profit before taxes was 26.5 (17.4) million euros. Resulting from the expiry of the ten-year shared ownership period, the turnover from investment in housing includes 81 million euros in sales of shares in shared ownership apartments. During 2004, a total of 1,629 (347) housing units were acquired from the completed housing stock. A total of 179 (228) new housing units were completed for the Group. The sum of 23 (23) million euros was spent on renovating the housing portfolio and upgrading housing units. During the financial year, 1,423 (498) rental homes with a combined value of 57 (21) million euros were sold. Housing development and construction During the financial year, a total of 1,327 (1,659) housing units were completed. Of these, 701 (566) were owner-occupied homes and 130 (186) were shared ownership apartments, and on client projects 496 (907) housing units were completed. The combined acquisition value of the completed owner-occupied homes was 122 (87) million euros. At year-end, 723 (828) owner-occupied homes were under construction. On client projects, 251 (413) housing units were under construction. The acquisition value of the owner-occupied home under construction was 135 (125) million euros. Turnover from the housing development and construction was 112 (84) million euros and profit before taxes 7.7 (0.5) million euros. The book value of the land inventory held by the Group was 26.1 million euros at the turn of the year. During the financial year, land inventory was acquired for a total of 14 million euros. The value of the land inventory sold and transferred to housing construction during the year was 13.5 million euros. Investments and divestments The Group s total investments amounted to 153 (42) million euros, of which 134 (38) million euros was allocated to fixed assets and 19 (4) million euros to inventories. The 1,572 housing units acquired from the Suomi Group at the beginning of the year, at an acquisition value of roughly 101 million euros, were the biggest investment of the year in During the financial year, assets were sold for a total of 60 (23) million euros. Personnel At the end of 2004, the Group had 215 (297) employees. The number of Group personnel averaged 228 (339) during the year. The downturn in the number of personnel during the year was due to the geographical consolidation of business as well as decisions on streamlining operations and outsourcing. Shareholders and shares The members of Sato Corporation plc s Board of Directors and the President held a total of 1,200 shares at year-end, corresponding to 0.05% of the company s shares and voting rights. During the financial year, Group companies sold the 1,200 shares they held in Sato Corporation plc to President and CEO Erkka Valkila. The annual general meeting held on 25 March 2004 authorised the company s Board of Directors to decide on the acquisition of treasury shares using the company s distributable assets. The authorisation can be used to acquire a number of shares with a combined par value or voting rights conferred by shares which is no more than five per cent of the company s share capital or voting rights of all shares after the acquisition. The annual general meeting authorised the Board of Directors to decide on the disposal of the treasury shares obtained on the basis of the above authorisation. The annual general meeting authorised the Board of Directors to decide on increasing the share capital by means of one or more issues of new shares and/or to decide on one or more issues of convertible bonds and/or issuing of share options, in such a way that a maximum total of 439,569 new company shares with a par value of EUR 2.00 may be subscribed in the new issue and/or issues of convertible bonds and/or issues of share options.on the basis of the authorisation, the company s share capital may be increased by a maximum total of 879, euros. The authorisations are valid for one year from the sate of the annual general meeting s decision. The authorisations have not been exercised. The Board of Directors, President and auditors Jouko Tuunainen served as the chairman of the Board of Directors. The other members of the Board of Directors were Heikki Hyppönen, Mauri Jaakonaho, Juhani Järvi (as of 25 March 2004), Raimo Lind, Jukka Peltola (until 25 March 2004), Martti Porkka, Pekka Pystynen (as of 25 March 2004), Jarmo Rytilahti, and Jukka Salminen. Erkka Valkila served as President and CEO. The company s auditors were KPMG Oy Ab, a firm of Authorised Public Accountants, with Markku Sohlman, APA, as the auditor in charge. Management Pekka Komulainen, M.Sc. (Eng.) was appointed Vice President of the Housing construction and development Division as of 1 May, when Pentti Järvinen, LL.M, retired. Kai Simberg, M.Sc. (Econ.&BA), was appointed Chief Financial Officer of the Group as of 4 October, with responsibility for financial affairs, financing, data administration and human resources. The Corporate Management Group is comprised, in addition to the above, of President and CEO Erkka Valkila, Vice President Tuula Entelä of the Investment in Housing Division, Head of Legal Affairs Katri Innanen and Director of Marketing and Communications Monica Aro. Outlook The rental income and rental occupancy rate for investment in housing is forecast to be on a par in 2005 with the previous year s figures. The volume of housing divestment business is likely to be down on the previous year. Demand for owneroccupied homes is expected to top out during the present year, and the number of owner-occupied homes built by the Group will be similar to the figure for Earnings from business operations are estimated to be on a par with the 2004 level. 29

30 Profit and loss account Profit and loss account Consolidated Parent company MEUR Note Turnover Other income from business operations Materials and services Personnel expenses Depreciation and write-downs Other expenses of business operations Operating profit Financial income and expenses Profit/loss before extraordinary items Extraordinary items Profit before taxes Direct taxes Minority interest -1 1 Net profit for the financial year

31 Balance sheet Balance sheet Consolidated Parent company MEUR Note Assets Fixed assets and other long-term investments Intangible assets Tangible assets Holdings in Group companies Holdings in associated companies Other holdings and shares Inventories and financial assets Inventories Long-term receivables Short-term receivables Financial securities Cash and bank deposits Assets, total 1,106 1, Liabilities and shareholders equity Shareholders equity Share capital Revaluation fund 0 0 Reserve fund Other funds Retained earnings Net profit for the financial year Minority interest 1 25 Consolidated reserve 0 1 Obligatory reserves Liabilities Long-term Current Liabilities and shareholders equity, total 1,106 1,

32 Cash flow statement Cash flow statement, indirect model Consolidated Parent company MEUR Cash flow from operating activities Profit before extraordinary items Adjustments: Depreciation Financial income (-) and expenses (+) Increase (+) / decrease (-) in obligatory reserves Capital gains (-) and losses (+) on fixed assets Other adjustments Cash flow before change in working capital Change in working capital: Decrease(+) / increase(-) in short-term non-interest-bearing receivables Decrease (+) / increase (-) in inventories Decrease (-) / increase (+) in short-term liabilities Adjustments to change in working capital 1 3 Cash flow before financial items and taxes Interest paid and payments on other financial expenses Dividends received Interest received Direct taxes paid Cash flow before extraordinary items Cash flow from extraordinary items in business operations 0 Cash flow from operating activities (A) Cash flow from investments Investments in tangible and intangible assets Undepreciated acquisition cost of surrendered tangible and intangible assets Profits on surrender of tangible and intangible assets Investments in other placements Repayments on loans Adjustments to cash flow from investments (non-cash items) Cash flow from investments (B)

33 Cash flow statement, indirect model Consolidated Parent company MEUR Cash flow from financial activities Change in minority interest (increase + / decrease -) -1 5 Short-term financing debts (net) Change in long-term financing debts Non-current non-interest bearing receivables Group contributions (on payment basis) 11-7 Dividend paid and other distribution of profit Adjustments to cash flow from financial activities (non-cash items) 7 22 Cash flow from financial activities (C) Effect of change in consolidation method -0 Change in cash and cash equivalents according to calculation (A+B+C) Cash and cash equivalents at start of year Effect of change in consolidation method -3 Cash and cash equivalents transferred in merger -0-0 Cash and cash equivalents at year-end

34 Accounting conventions of the financial statements as at 31 December 2004 Valuation principles Valuation of fixed assets Fixed assets have been valued at the historical cost or at a value adjusted for revaluations less accumulated depreciation and write-downs. Straight-line depreciation based on the economic life has been deducted from the original acquisition cost of buildings. Depreciation calculated on the economic life has been deducted from the historical cost of other fixed assets in the case of fixed assets acquired since 1 January The historical cost of other fixed assets purchased before this date is depreciated at the maximum rate permitted by the Finnish Companies Taxation Act. No depreciation has been made on revaluations. The planned depreciation periods based on the economic life are as follows: Vehicles 4 years Computer hardware and software 3 6 years Office machinery 5 years Office equipment 10 years Buildings 67 years Machinery and equipment in buildings 20 years Civil defence shelters in buildings 40 years Other buildings and renovation expenditure on a case-by-case basis according to a separate assessment. Investments in housing companies and mutual building management companies one per cent of the remainder of the investment. Valuation of inventories Inventories have been valued at the direct historical cost. In the event that the probable surrender or repurchase value of the asset is lower than the historical cost on closing the books, the difference has been booked as an expense. Valuation of financial assets Financial assets have been valued at par value or at their probable value if lower. Items denominated in foreign currency Receivables and debts denominated in foreign currency have been valued at the exchange rate valid on closing the books. Income-recognition of projects The margin of housing development and construction has been income-recognised in accordance with the terms of invoicing in the agreement. The margin for projects handed over after a separate inspection, is income-recognised at the handover date. The margin of completed owneroccupied homes which are unsold on closing the books has been eliminated. A profit arising from the surrender of a plot to a property holding company is income-recognised on the date of the project s completion and a loss on the handover date. Obligatory reserves A refund claim expense reserve is made on the basis both of an estimate from experience and on claims for damages submitted. A reserve based on estimates is constituted for expenses related to business reorganisations. Matching of pension expenses Pension cover for the employees has been arranged through a pension insurance company. Accounting principles of the consolidated financial statement Scope of the consolidated financial statement The consolidated financial statements cover the parent company and the following subsidiaries and associated companies together with their own subsidiaries and associated companies: Kanta-Suomen Sato Oy, Outakessa Oy, Sato Nyt Oy, Satoportaat Oy, Sato Vuokrakodit Oy, Sato-Kotiportaat Oy, Sato-OVA Oy, Satopos 105 Oy, Sato-Rakennuttajat Oy, Suomen Satokodit Oy, Vatro Oy, Vatroasunnot Oy and Vatrotalot Oy. The consolidation includes the subsidiaries included in inventories and fixed assets with the following exceptions: The main unconsolidated companies are comprised of the housing companytype corporations in the inventories of Sato-Kotiportaat Oy, Satoportaat Oy, Sato Nyt Oy and Sato-OVA Oy. The reason these companies are not consolidated is because of the nature of the shared ownership system. It is intended that the shares in the subsidiaries, after the period of shared ownership, will become wholly own by the part-owners and are therefore in the nature of inventories intended for sale. 34

35 The total of the housing companies debts, promissory notes securing debts, and repurchase liability related to the shared ownership, is given in the notes to the balance sheet section 28. Also left unconsolidated are some inactive and small subsidiaries and associated companies. These cases of non-consolidation have not significantly affected the sum of the Group s shareholders equity or net profit. The Sato Group holds 50 per cent of the issued stock of Suomen Asumisoikeus Oy. Suomen Asumisoikeus Oy may, under the ARAVA Act (1189/93), Subsidised Interest for Rental Home Loans and Right-of-occupancy Building Loans Act (604/2001) and decision 666/2001 by the Council of State, pay a shareholder an annual return, the taxable maximum amount of which is 8 per cent and the tax-free maximum amount of which is 5.68 per cent of the amount actually invested in the company by the shareholder. Suomen Asumisoikeus Oy may, on the basis of this, pay the Sato Group a dividend of no more than EUR 47 thousand per year. The maximum selling price of shares in Suomen Asumisoikeus Oy is their par value revised in line with the change in construction expenses. The assets accruing from a right-ofoccupancy community s activities are not figured into the amount of the surrender price of the shares as a factor. The Suomen Asumisoikeus Oy corporate group had no distributable assets in its financial statements as at 31 December On the basis of the above, Suomen Asumisoikeus Oy s 7.3 (4.4) million euros in net profit has not been consolidated with the financial statements of Sato Corporation plc. The way in which the consolidated financial statements were produced has complied with a consolidation method for the housing companies and mutual building management companies income, expenses and depreciation which differs from the previous practice. Of these companies income, expenses and depreciation, only the part accruing from Group-owned premises has been included in the consolidated profit and loss account. Similarly, the consolidated balance sheet includes the total acquisition costs of the Group-owned premises and loans which apply to the premises, including those loans taken by housing companies and mutual building management companies which apply to shares held by the Group. The updated consolidation method gives a more correct view than before of the Group s position, as minority shareholders holdings in these companies shareholders equity are not treated as minority shareholdings of the Group and the Group s debts are not consolidated with the debt portions for which these shareholders are liable. Mutual shareholdings The consolidated financial statements have been drawn up using the historical cost method (excluding housing companies and mutual building management companies). The acquisition cost of the subsidiaries which exceeded their shareholders equity on the acquisition date is for the main part allocated in the consolidated financial statements to the acquisition cost of buildings and plots and the difference has been treated as consolidation goodwill. The calculation of acquisition costs in previous years was not adjusted by the amount of shareholders equity separated from the reserves on the acquisition date. Goodwill allocated to asset items has been depreciated in accordance with the planned depreciation principles for the asset item in question. Consolidation goodwill has been subjected to straight-line depreciation over 10 years. Intra-Group transactions and margins Intra-Group receivables, debts, income and expenses have been eliminated, as have dividend payments and internal margins between Group companies. Minority interests The minority interests separated from the shareholders equity and net profit of the companies consolidated by the historic cost method are shown as separate items in the consolidated balance sheet and the profit and loss account. 35

36 Taxes Taxes for the financial year have been calculated on the basis of the taxable income. The accumulated depreciation differences and residential building reserves for the companies consolidated with the historic cost method have been divided into shareholders equity, minority interest and tax liability in the consolidated financial statements. The deferred tax liability has been calculated in accordance with option 1 of the Accounting Board s general guidelines of 11 January 1999 from the matching differences affecting the profit and loss account, from voluntary reserves and depreciation differences, and from consolidation actions credited or charged to income. The comparability of the financial statements information The comparison data for 2003 could not be adjusted to correspond to the new consolidation method, so these data are not comparable. Housing companies and mutual building management companies do not generally accrue a profit or loss. Insofar as these companies have accrued consolidated shareholders equity by 31 December 2003, the transfer to the new consolidation method will result in non-recurring income and expenses, which in accordance with the new accounting conventions is shown in the consolidated financial statements as extraordinary income and expenses totalling 2.0 million euros. The change in the consolidation method also includes the change in company form of 9 ordinary building management companies into housing companies during Minority shareholders holdings in the shareholders equity of housing companies and mutual building management companies are not treated as the Group s minority shareholdings and the portion of debt to which these shareholders are liable is not consolidated with the Group s debts. Below are the Sato Group s pro forma financial statements as at 31 December 2003, in which housing companies and mutual building management companies have been consolidated in accordance with the above principles. Consolidated profit and loss account (MEUR) 2004 Pro forma 2003 Official 2003 Turnover Operating profit Financial income and expenses Profit before extraordinary items Extraordinary items -2 Direct taxes Minority interest in profit Net profit for the financial year Consolidated balance sheet (MEUR) 2004 Pro forma 2003 Official 2003 Fixed assets and other long-term investments Inventories and financial assets Assets total 1,106 1,051 1,074 Shareholders equity Minority interest Consolidated reserve Obligatory reserves Long-term liabilities Current liabilities Liabilities and shareholders equity total 1,106 1,051 1,074 36

37 Notes Notes to the profit and loss account Group Parent company MEUR Turnover Rental income and remuneration Building management and maintenance fees Sales of shares Construction commissioning fee Consultancy fee 0.0 Other income from construction commissioning Other income Other income from business operations Other income from business operations Capital gains from fixed assets Materials and services Purchases during the financial year (= procurements) Change in inventories Personnel expenses Wages and salaries Pension expenses Other indirect employee costs Salaries and fees for management President and members of the Board of Directors The President and CEO is entitled to retire at the age of The Group and parent company had during the financial year an average number of Employees Depreciation Depreciation on tangible and intangible assets Write-downs on fixed assets and long-term investments

38 Notes to the profit and loss account Group Parent company MEUR Other expenses of business operations Rents Properties maintenance expenses Other fixed expenses Administrative expenses charged Other expenses of business operations Financial income and expenses Dividend income From Group companies From others Dividend income total Interest income on long-term investments From Group companies From others Interest expenses and other financial expenses To Group companies Charges to Group companies for interest rate hedging expenses To others Financial income and expenses total Extraordinary items Extraordinary income Group contributions Profit on merger Extraordinary expenses Effect of change in consolidation method Direct taxes Income taxes on actual business Change in deferred tax liability Change in deferred tax credit

39 Notes to the balance sheet Group Parent company MEUR Intangible assets Intangible rights Acquisition cost 1 Jan Increases 0.0 Decreases -0.0 Acquisition cost 31 Dec Accumulated depreciation and write-downs 1 Jan Depreciation for year Accumulated depreciation 31 Dec Effect of change in consolidation method -0.0 Book value 31 Dec Consolidated goodwill Acquisition cost 1 Jan Increases 0.2 Decreases -0.0 Acquisition cost 31 Dec Accumulated depreciation 1 Jan Depreciation for year Accumulated depreciation 31 Dec Effect of change in consolidation method 0.0 Book value 31 Dec Other long-term expenditure Acquisition cost 1 Jan Increases Decreases Transfers between items -0.1 Acquisition cost 31 Dec Accumulated depreciation and write-downs 1 Jan Depreciation for year Accumulated depreciation 31 Dec Effect of change in consolidation method -0.1 Book value 31 Dec Intangible assets total

40 Notes to the balance sheet Group Parent company MEUR Tangible assets Land and water areas Acquisition cost 1 Jan Increases Decreases Transfers between items 1.7 Acquisition cost 31 Dec Accumulated write-downs 1 Jan Revaluations Effect of change in consolidation method Book value 31 Dec Buildings and structures Acquisition cost 1 Jan Increases Decreases Transfers between items Acquisition cost 31 Dec Accumulated depreciation and write-downs 1 Jan Depreciation for year Write-downs Accumulated depreciation 31 Dec Revaluations Effect of change in consolidation method Book value 31 Dec Connection fees Acquisition cost 1 Jan Increases Decreases Effect of change in consolidation method -3.3 Acquisition cost 31 Dec Machinery and equipment Acquisition cost 1 Jan Increases Decreases Acquisition cost 31 Dec Accumulated depreciation and write-downs 1 Jan Depreciation for year Accumulated depreciation 31 Dec Effect of change in consolidation method -1.9 Book value 31 Dec

41 Notes to the balance sheet Group Parent company MEUR Other tangible assets Acquisition cost 1 Jan Increases Decreases -0.0 Transfers between items 0.1 Acquisition cost 31 Dec Accumulated depreciation and write-downs 1 Jan Depreciation for year Accumulated depreciation 31 Dec Effect of change in consolidation method 0.1 Book value 31 Dec Advance payments Acquisition cost 1 Jan Increases Decreases Effect of change in consolidation method -0.9 Book value 31 Dec Tangible assets total Summary of revaluations Land and water areas Value 1 Jan Value 31 Dec Buildings and structures Value 1 Jan Disbursement of revaluations 1 Jan.-31 Dec Value 31 Dec

42 Notes to the balance sheet Group Parent company MEUR Holdings in Group companies Acquisition cost 1 Jan Increases Decreases Transfers between items Acquisition cost 31 Dec Book value 31 Dec Holdings in participating interests Acquisition cost 1 Jan Increases Decreases -0.1 Transfers between items -0.4 Acquisition cost 31 Dec Accumulated write-downs 1 Jan Accumulated write-downs 31 Dec. 0.1 Effect of change in consolidation method 0.2 Book value 31 Dec Other stocks and shares Acquisition cost 1 Jan Increases Decreases Transfers between items Acquisition cost 31 Dec Accumulated write-downs 1 Jan Write-downs Accumulated write-downs 31 Dec Book value 31 Dec Investments/housing companies and mutual building management companies Investments total

43 Notes to the balance sheet Group Parent company MEUR Inventories Housing under construction Completed housing units and commercial space Land areas and land area companies Other inventories Book value 31 Dec Non-current receivables Notes receivable Notes receivable, Group Deferred tax credits Other receivables Book value 31 Dec Deferred tax credits Resulting from companies matching differences Resulting from intra-group margins Current receivables Receivables from Group companies Accounts receivable Notes receivable Other receivables 0.0 Accrued assets Receivables from others Accounts receivable Notes receivable Other receivables Accrued assets Current receivables total Receivables, total

44 Notes to the balance sheet Group Parent company MEUR Shareholders equity Share capital 1 Jan Share capital 31 Dec Revaluation fund 1 Jan Revaluation fund 31 Dec Reserve fund 1 Jan Reserve fund 31 Dec Other funds 1 Jan Other funds 31 Dec Retained profits 1 Jan Dividend payment Retained earnings 31 Dec Net profit for the financial year Shareholders equity total 31 Dec Calculation of distributable assets Other funds Retained earnings Net profit for year The portion of accumulated depreciation difference and voluntary reserves entered in shareholders equity plus the non-distributable shareholders equity of non-profit companies in the sphere of housing legislation s provisions on distribution of profit Distributable assets 31 Dec The parent company s share capital is divided into shares as follows Number of shares 2, , Combined par value of shares Number of shares in the parent company held by the Group 1,200 Combined par value of shares in the parent company held by the Group 0.0 Combined book value of shares in the parent company held by the Group Obligatory reserves Refund claim expense reserve Other obligatory reserves

45 Notes to the balance sheet Group Parent company MEUR Long-term liabilities Other long-term debts Loans from financial institutions Loans from financial institutions (housing companies and mutual building management companies) 53.7 Pension loans Loans, Group Advances received Deferred tax liability Other debts Long-term liabilities 31 Dec Debts maturing in more than five years Loans from financial institutions Pension loans Current liabilities Debts to Group companies Loans Accounts payable Deferred liabilities Debts to others Loans from financial institutions Pension loans Advances received Accounts payable Other debts Deferred liabilities Current liabilities 31 Dec

46 Notes to the balance sheet Group Parent company MEUR Collateral, contingent liabilities and other commitments For own debt Pledged shares Corporate mortgages Mortgages on land areas and buildings For Group company debts Pledges Guarantees For others Guarantees Other own commitments Buy-back commitments Leasing commitments To be paid in the next financial year To be paid in subsequent financial years Other own commitments Total Pledges Corporate mortgages Mortgages on land areas and buildings Guarantees Other commitments Pledges and contingent liabilities, total , Commitments for shared ownership apartments The combined total of the loans of housing company-type subsidiaries of Sato-Kotiportaat Oy, Satoportaat Oy, Vatrotalot Oy, and Sato-Nyt Oy, which are included in the shared ownership system was MEUR (MEUR on 31 December 2003). The collateral for the loans is property mortgages totalling MEUR (MEUR on 31 December 2003), which are not included in the combined total for mortgages in the commitment list. The repurchase liability for part-owners holdings was MEUR 20.2 (MEUR 30.1 on 31 December 2003), of which MEUR 19.5 (MEUR 27.7 on 31 December 2003) has been treated as an advance payment debt in the balance sheet. 46

47 Investments Group s Parent company s Subsidiaries consolidated with the Group holding, % holding, % Subsidiaries owned by Sato Corporation plc As Oy Espoon Heinjoenpolku As Oy Kastevuoren Palvelutalo As Oy Lappeenrannan Metsäsaimaankatu As Oy Louhenketo K Oy Espoon Solberga Kanta-Suomen Sato Oy Outakessa Oy Oy Uudenmaanlinna Sato Nyt Oy Sato Vuokrakodit Oy Sato-Rakennuttajat Oy Suomen Satokodit Oy Vatro Oy Vatrotalot Oy Companies owned by subsidiaries Sato Nyt Oy As Oy Agricolankuja As Oy Espoon Punatulkuntie As Oy Espoon Punatulkuntie As Oy Espoon Pyhäjärventie As Oy Espoon Ruusulinna As Oy Espoon Vanharaide As Oy Espoon Zanseninkuja As Oy Eura III As Oy Helsingin Ansaritie As Oy Helsingin Ansaritie As Oy Helsingin Ansaritie As Oy Helsingin Apollonkatu As Oy Helsingin Castreninkatu As Oy Helsingin Eliel Saarisen tie As Oy Helsingin Kaivonkatsojantie As Oy Helsingin Kangaspellontie As Oy Helsingin Kangaspellontie As Oy Helsingin Kangaspellontie As Oy Helsingin Klaavuntie As Oy Helsingin Korppaanmäki As Oy Helsingin Korppaantie As Oy Helsingin Kristianinkatu As Oy Helsingin Kultareuna As Oy Helsingin Mechelininkatu As Oy Helsingin Pakilantie As Oy Helsingin Perustie As Oy Helsingin Puuskarinne As Oy Helsingin Ruusutarhantie As Oy Helsingin Solnantie As Oy Helsingin Stenbäckinkatu As Oy Helsingin Ståhlbergintie As Oy Helsingin Tuurakuja As Oy Helsingin Vanha viertotie As Oy Helsingin Vanha viertotie As Oy Helsingin Vanha Viertotie As Oy Helsingin Vanha Viertotie As Oy Helsingin Vuosaaren Helmi As Oy Hgin Hildankulma As Oy Jyväskylän Ailakinraitti As Oy Kasarmikatu 14 - Bostads Ab Kasärngatan As Oy Kasarminkatu As Oy Kauniaisten Ersintie As Oy Kuopion Pyöröntähti

48 Group s Parent company s Subsidiaries consolidated with the Group holding, % holding, % As Oy Kuopion Venemiehenkatu As Oy Lipparanta As Oy Messilä As Oy Myllysalama As Oy Myyrinhaukka As Oy Oulun Aleksinranta As Oy Oulun Kalevalantie As Oy Oulun Laanila I As Oy Oulun Laanila IV As Oy Salpakolmio As Oy Sodankylän Metsämaa As Oy Tampereen Jankanpuisto As Oy Tampereen Kanjoninkatu As Oy Tampereen Rotkonraitti As Oy Tampereen Tarmonkatu As Oy Tarkk ampujankatu As Oy Terhokuja As Oy Vantaan Aapramintie As Oy Vantaan Kaarenlehmus As Oy Vantaan Pronssikuja As Oy Vuorastila K Oy Espoon Joupinpolku K Oy Helsingin Lauttasaarentie K Oy Kaarentuomi K Oy Kangaspellontie K Oy Mannerheimintie Länsi-Hämeen Sato Oy Sato-Kotiportaat Oy Sato-Kotiportaat Oy Sato-Ova Oy Sato-Ova Oy As Oy Riihimäen Kolehmaisentori As Oy Riihimäen Varjolehto As Oy Risuharankuja As Oy Rovaniemen mlk:n Niittykuja Sato Vuokrakodit Oy As Oy Helsingin Finniläntalo As Oy Kuopion Lakeissuontie Suomen Satokodit Oy As Oy Vantaan Kortteeri K Oy Karpalopolku Vatro Oy As Oy Byraden As Oy Espoon Sepetlahdentie As Oy Helsingin Hämeenpenger As Oy Helsingin Pasilantornit As Oy Hollolan Harjukoivu As Oy Hollolan Hiihto-Salpa As Oy Lapponia As Oy Lohjan Koulukuja As Oy Lohjan Riihenkiuas As Oy Oulun Utelias-Salpa As Oy Pietarsaaren Sätkä As Oy Porin Ojantie As Oy T:reen Hervannan Puistokallio As Oy Tornion Kuparimarkka As Oy Turun Veistämöntori As Oy Uudenkaupungin Saab-Haka As Oy Uudenkaupungin Saab-Sato As Oy Uudenkaupungin Santtionrivi F Ab Bodbacken K Oy K Oy Espoon Solberga

49 Group s Parent company s Subsidiaries consolidated with the Group holding, % holding, % K Oy Jyskävaara K Oy Kaasilankulma K Oy Kaksi Tornia K Oy Kivisato K Oy Koulukuja K Oy Lukkokoti K Oy Nummenpuisto K Oy Ojamonkuusi K Oy Osuniemi K Oy Pajamäentie K Oy Puijonsato K Oy Pupukarsikko K Oy Riikuntie K Oy Sahaajankulma K Oy Tikkurilan Satotalo K Oy Vemmelkarsikko Loilanpuisto Oy Oy Uudenmaanlinna Pateniemenhaka Oy Satopos 105 Oy Satopos 107V Oy As Oy Vantaan Martinpääsky Vatroasunnot Oy Vatroasunnot Oy As Oy Kastevuoren Palvelutalo As Oy Kuopion Pyörönkeskus As Oy Kuusikkoahde As Oy Liljanpolku As Oy Mertakuja As Oy Metsolanharju As Oy Pohjankartano As Oy Pyörön bulevardi As Oy Satosaila As Oy Satulapuisto As Oy Tikkamatti As Oy Ulpukkaniemi As Oy Vaajasoppi As Oy Vartio-Sato As Oy Viitasaaren Oravanpesä K Oy Mannerheimintie Vatrotalot Oy As Oy Ahmonpesä As Oy Elimäen Joutsenpiha As Oy Forssan Ystävyydenaukio As Oy Hallunkallio As Oy Harjulansato As Oy Harjulehmus As Oy Helsingin Laivalahdenportti As Oy Helsingin Toini Muonan katu As Oy Hämeenlinnan Aaponkuja As Oy Ikaalisten Päiväniitty As Oy Ivalon Kotipiha As Oy Joensuun Elosato As Oy Jukolanniitty As Oy Jukolantanner As Oy Kajaanin Välimaanrinne As Oy Kankaanpään Peuranpolku As Oy Karhukorkalo As Oy Kavilanniitty As Oy Kemin Välipuisto As Oy Kirkkonummen Riihipolku As Oy Kivilahdensato

50 Group s Parent company s Subsidiaries consolidated with the Group holding, % holding, % As Oy Koosakallio As Oy Kuhmon Oravapolku As Oy Kuopion Tikassato As Oy Kuopion Vuorikatu As Oy Kuusaanpuisto As Oy Kuussaarikonrivi As Oy Kylänpäänkaari As Oy Kylänpäänpelto As Oy Laakavuorentie As Oy Lahden Roopenkuja As Oy Lappalaisentie As Oy Laukaan Raunilansato As Oy Linkinkoppi As Oy Meriramsi As Oy Meri-Rastilan tie As Oy Mertakuja As Oy Messukallio As Oy Mikkelin Tuttusato As Oy Muuramen Rajalansato As Oy Männikkösato As Oy Naantalin Kastovuorenrinne As Oy Nastolan Moreeniraitti As Oy Nuolikadunpuisto As Oy Nurmijärven Kylänpäänniitty As Oy Nurmon Karhunpolku As Oy Otavansato As Oy Paleninsato As Oy Papinrinteensato As Oy Pohjanpoika As Oy Porin Rekipelto As Oy Poskilammenpuisto As Oy Puolukkavarikko As Oy Pupumäki As Oy Rakentajankuja As Oy Riviuhkola As Oy Saarenkylän Saarenkartanot As Oy Salon Valhojanrivi As Oy Sato-Osva As Oy Satosyppi As Oy Satotaival As Oy Sodankylän Hannuskoto As Oy Sääkskulma As Oy Torvelankatu As Oy Turun Metallikatu As Oy Turun Mietoistenkuja As Oy Tölönkoivu As Oy Tölönpaju As Oy Vantaan Minkkikuja As Oy Vantaan Ravurinmäki As Oy Vantaan Ravurinpuisto As Oy Virinsato K Oy H:gin Muurahaisenpolku K Oy Kukkaropohja K Oy Salpalohi Satoportaat Oy Satoportaat Oy As Oy Espoon Puropuisto As Oy Jyväskylän mlk:n Kirkkotie As Oy Jyväskylän Vaneritori As Oy Oulun Laamannintie 14 ja As Oy Tampereen Kyläleni As Oy Tampereen Rantatie

51 Key indicators Five-year review * Key indicators for financial trend Turnover MEUR Operating profit MEUR as percentage of turnover Net financing expenses MEUR as percentage of turnover Profit before extraordinary items MEUR as percentage of turnover Profit before taxes MEUR as percentage of turnover Balance sheet total MEUR 1,218 1,285 1,043 1,074 1,106 Shareholders equity and minority interest MEUR Liabilities, MEUR 1,013 1, Return on equity, % (ROE) Return on investment, % (ROI) Equity ratio, % Gross investments in fixed assets, MEUR as percentage of turnover Personnel, average Key indicators for shares Earnings per share, EUR Shareholders equity per share EUR Dividend per share, EUR ** Dividend, MEUR ** Adjusted number of shares average 2,196,746 2,196,746 2,196,746 2,196,646 2,197,846 * The financial key indicators for are not comparable to those of 2004 due to a change in the consolidation method ** Based on the Board of Directors proposed dividend for 2004 Formulas for key indicators Return on equity, % Return on investment, % = = (Profit or loss before extraordinary items taxes) x 100 Shareholders equity + minority interest (average during the financial year) (Profit or loss before extraordinary items + interest expenses and other financing expenses) x 100 Balance sheet total non-interest-bearing debts (average during the financial year) Equity per share, Dividend per share, = = = Shareholders equity Adjusted number of shares on closing the books Dividend paid for year Adjusted number of shares on closing the books Equity ratio, % = (Shareholders equity + minority interest) x 100 Balance sheet total Advances received Earnings per share, = Profit before extraordinary items taxes +/ minority interest Adjusted number of shares (average during the financial year) 51

52 Proposal for the disposal of profits The Group s distributable shareholders equity as at 31 December 2004 was EUR 13,371,979.94, when the portion of voluntary reserves and depreciation differences included in the shareholders equity plus the non-distributable shareholders equity of non-profit companies in the sphere of housing legislation s provisions on distribution of profit have been deducted from the shareholders equity. Helsinki, 21 February 2005 The parent company s distributable shareholders equity as at 31 December 2004 was EUR 25,331, The company s issued shares conferring title to dividend for 2004 totalled 2,197,846 on 31 December The Board of Directors proposes to the annual general meeting that dividend be paid of EUR 5.50 per share, being a total of EUR 12,088,153 and that EUR 13,243, be left as shareholders equity. Jouko Tuunainen Heikki Hyppönen Mauri Jaakonaho Juhani Järvi Raimo Lind Martti Porkka Pekka Pystynen Jarmo Rytilahti Jukka Salminen Erkka Valkila President and CEO The above financial statements have been prepared in accordance with generally accepted accounting principles. An auditors report has been submitted today on the audit performed. KPMG OY AB Markku Sohlman, APA Helsinki, 4 March

53 Auditors report To the shareholders of Sato Corporation plc We have audited the accounting, financial statements and administration of Sato Corporation plc for the financial year 1 January 31 Dec The financial statements produced by the Board of Directors and President include a report on operations as well as the consolidated and parent company profit and loss account, balance sheet and notes to the financial statements. On the basis of the audit we have performed, we make our declaration on the financial statements and the parent company s administration. The audit has been performed in accordance with generally accepted auditing principles. The accounting, and the principles, content and presentation of the financial statements have thus been audited in sufficient scope to determine that the financial statements contain no essential errors or omissions. In the audit of the administration, the compliance of the parent company s Board members and the President and CEO with the regulations of the Companies Act was examined. As our declaration, we submit that the financial statements have been drawn up in accordance with the Accounting Act as well as with other rules and regulations concerning the production of financial statements. The financial statements give, as required by the Accounting Act, a true and fair view of both the parent company s financial result and its financial status. The financial statements and consolidated financial statements may be adopted and release from personal liability may be granted to the members of the parent company s Board of Directors and to the President and CEO for the financial year audited by us. The proposal of the Board of Directors for the treatment of profit is in compliance with the Companies Act. Helsinki, 4 March 2005 KPMG OY AB Markku Sohlman KHT 53

54 Corporate governance The governance of Sato Corporation plc is based on the Companies Act and Sato Corporation plc s articles of association and on the recommendation for listed companies corporate governance. Authority and the governance of the company are divided among the annual general meeting, the Board of Directors and the President and CEO. The annual general meeting The annual general meeting must be held once a year by the end of May. The annual general meeting decides on the matters due to it under the Companies Act. Also, the annual general meeting elects the chairman of the Board of Directors and decides on the fees to be paid to the members of the Board of Directors and auditors. The Board of Directors The company s Board of Directors attends to the company s administration and the proper arrangement of its business. In addition to the duties specified by the Companies Act, the Board of Directors decides on matters which have considerable importance to the Group s business in view of the scope and size of the Group s operations. The duties of the Board of Directors include, for example, the approval of the Group s business strategy and monitoring its implementation, and the confirmation and monitoring of the annual budget, the business plan and related investment and divestment plans. Also, the Board of Directors appoints the President and CEO, his deputy, and the members of the Corporate Management Group, and it decides on their terms of employment and postings. The company s Board of Directors has from five to nine members, elected by the annual general meeting. In 2004, the Board had nine members. The term in office of the members of the Board of Directors lasts until the closing of the annual general meeting following the one at which they were elected. In 2004, the Board of Directors convened on 11 occasions. An average of 85% of the members of the Board of Directors attended the Board meetings. Information on the members of the company s Board of Directors is given on page 54. President and CEO The Board of Directors appoints the company s President and CEO and his deputy. The duties of President and CEO are defined by the law, the articles of association, and guidelines supplied by the Board of Directors. The President and CEO is responsible for the Group s business, the planning thereof and the attainment of its goals. The President and CEO attends to the everyday management of the company in accordance with the rules and regulations supplied by the Board of Directors. The President and CEO is Erkka Valkila, B.Sc. (Eng.), and the deputy to the President is Vice President Tuula Entelä, LL.M, B.Sc. (Econ.). The Corporate Management Group The Corporate Management Group deals with key issues for the management such as matters related to the strategy, budgeting, investments, business planning, and financial reporting. The Corporate Management Group s duties include the implementation of the decisions of the Board of Directors under the leadership of the President and CEO. The Management Group is comprised of Sato Corporation plc s President and CEO as well as the Directors in charge of the Group s business areas and supporting functions. The Management Group convenes once a week. The duties of the Corporate Management Group members and their personal details are given on page

55 Salaries and fees The fees to be paid to the company s Board of Directors and auditors are decided by the annual general meeting. The annual general meeting which convened on 25 March 2004 decided that the chairman of the Board of Directors was to be paid EUR 22,000 and the members of the Board of Directors were to be paid EUR 12,000 for the term. The fee for meetings was to be EUR 500 per meeting for the chairman of the Board of Directors and EUR 400 for members. The fees for the Board of Directors in 2004 totalled EUR 144,375. No shares or share-related entitlements were surrendered to members of the Board of Directors during the financial year. It was decided to pay the auditors fee on invoice. Audit fees were paid by the Sato Group during the financial year to the tune of EUR 228,000. The audit firm was paid EUR 91,000 for services not included in the audit. The salaries and bonuses paid to the President and CEO and members of the Corporate Management Group are decided by the company s Board of Directors. People employed by the Group are not paid a separate fee when they serve as a member of the Board of Directors or as President of a Group company. The salary and other perquisites of the President and CEO in 2004 were EUR 230,000. The President and CEO s retirement age is 60 years. At that time, he is entitled to a pension amounting to 60% salary at retirement. The period of notice for the President is six months. In the event that the company terminates the service of the President and CEO before retirement age, the President and CEO will be entitled to 12 months of full salary in redundancy pay in addition to the salary for the period of notice. The corporate management is covered by an annual incentive scheme based on the Group s profit, the yield of the shareholders equity and the return on investment, and the attainment of the main targets in the specific sphere of responsibility. The corporate management is also covered by a long-term incentive scheme based on the cumulative profit for the financial years The Board of Directors approves the payment of bonuses. Supervision and risk management The audit inspects the company and consolidated accounting, the financial statements and administration. The function of the internal audit is to verify the efficiency and appropriacy of the functions, the accuracy of financial and operational reporting, and the compliance of operations with the law, as well as to ensure that the company s assets are secured. Sato Corporation plc has one auditor, which must be an auditing firm approved by the Central Chamber of Commerce. The auditor s term is the financial year and his term ends at the closing of the annual general meeting following the one at which he was elected. The auditor for the financial year 1 January-31 December 2004 was KPMG Oy Ab. The auditor responsible for the auditing was Markku Sohlman, M.Sc. (Econ. & BA), APA. In autumn 2004, Deloitte & Touche Oy was chosen to carry out the internal audit within the Group. Articles of association and shares Sato Corporation plc s current articles of association were registered on 16 April The articles of association do not include orders on share buybacks. The company s share capital is EUR 4,395,692.00, divided into 2,197,846 shares. The par value of a share is two euros. Shareholder agreements The company is not aware of any current shareholder agreements. 55

56 The Board of Directors Jouko Tuunainen born 1945, Commercial Counsellor on the Board of Directors since 1998 chairman of the Board of Directors since 2000 Heikki Hyppönen born 1945, B.Sc. (Econ.) on the Board of Directors and since 2001 Mauri Jaakonaho born 1946, Senior Vice President, Finance and Administration on the Board of Directors since 1997 Juhani Järvi born 1952, Executive Vice President, Chief Financial Officer on the Board of Directors since 2004 Raimo Lind born 1953, Executive Vice President, Chief Financial Officer on the Board of Directors since 2001 Jukka Salminen born 1947, Executive Vice President, Commercial Counsellor on the Board of Directors since 1993 Pekka Pystynen born 1947, President and CEO on the Board of Directors since 2004 Jarmo Rytilahti born 1944, B.Sc. (Econ.) on the Board of Directors since 2003 Martti Porkka born 1951, Head of Group Treasury and Funding on the Board of Directors since

57 Corporate Management Group Erkka Valkila born 1953, B.Sc. (Eng.) President and CEO has worked for Sato since 2003 Shareholding in Sato: 1,400 shares Tuula Entelä born 1955, B.Sc. (Econ.), LL.M. Vice President, Investment in Housing, Deputy to President and CEO has worked for Sato since 1981 Shareholding in Sato: 300 shares Pekka Komulainen born 1958, M.Sc.(Eng.) Vice President, Housing Development and Construction has worked for Sato since 2004 Shareholding in Sato: 300 shares Monica Aro born 1954, B.Sc. (Econ.), LL.M., MBA Director, Marketing and Communications has worked for Sato since 1990 Kai Simberg born 1960, M.Sc. (Econ.&BA) Chief Financial Officer has worked for Sato since 2004 Katri Innanen born 1960, LL.M. Head of Legal Affairs has worked for Sato since